Tax Changes by Liberals

The Impact of the Proposed Tax Changes on Small businesses

By: Harpreet K Wadehra, CPA CA

Why I won’t keep quiet anymore…

To date, I’ve kept mostly quiet about the proposed tax changes released on July 18, 2017 by Finance Minister Bill Morneau. My first impressions when I read the proposed changes were that they are ridiculous and challenge the foundation upon which business and the economy have grown in Canada. I decided to let it be and perhaps with time, the logic of why the Liberals considered most small business owners to be “tax cheats” would come to me. Sadly, I have come up with nothing since then.

One detail that I think the Liberals have overlooked is that the concept and definition of “middle class” is different for employed versus most other business owners. Who are these middle class taxpayers that the Liberals are trying to protect and improve the quality of life for?

According to the Liberals, the middle class are Canadian families who have household income of less than $90,000. From my perspective, however, the “middle class” cannot be defined by a threshold or a number.

As a sole practitioner, I have seen both extremes:

A family where only one spouse is working (employed with T4 income) and the other is at home taking care of the kids. This family is trying to maintain their busy lifestyle; and

A family where both husband and wife are working (through their corporations), have kids in school and are also trying to maintain their equally very busy lifestyle

To my mind, both these families would be considered middle class.

A family with one spouse earning employment income often qualifies for various tax-free benefits, including, but not limited to: Canada child tax benefit, OTB, GST/HST, etc. In addition, these families often qualify for OSAP and, recently in Ontario with the enhanced program, some can get most of their tuition paid by the province. The working spouse also has an employer provided pension plan, health and dental benefits for all the kids, life insurance, AD&D, etc.

Compare this to a family where both spouses are working and earning income through their own corporations. I will use my example in this case. My business has ups and downs – as does any business – hence I need to save money for the rainy days or rainy years. The Liberals have not yet determined how the addition tax on passive investments will be levied, but I’m left wondering if the changes to come will mean I will be taxed for having a rainy day fund? In slow times, am I expected to let go of my three staff (who, incidentally, would likely meet the Liberal’s definition of middle class)? I’ve invested time, money and sweat into training them, so the changes imply that I am to be punished for planning, as a prudent business owner.

Wait, did I forget that I don’t have any dental and medical insurance, AD&D or other benefits? These are self-funded. In addition, I am required to pay 1.4 times the employment insurance rates paid by my staff and to match their CPP payments. Further, I pay WSIB and, when the payroll cost exceeds $450,000 annually, pay EHT (Employer Health Tax) as an additional tax burden.

I am dumbfounded as to how the Liberals can say that the family in situation 2 is taking advantage of “tax loopholes?”

The bigger question is: how will this tax change be enacted? In dealing with small business owners, I see already the unreal level of stress associated with dealing with the Canada Revenue Agency (CRA), tax compliance and tax changes. Will these small business owners now be forced to incur the cost of getting valuations of their companies and/or restructuring to implement and administer these new rules?

My personal opinion is that the tax system in Canada is unnecessarily complicated. To add these new rules will mean more tax compliance and complexities. If the Liberals are truly concerned with incorporated taxpayers taking advantage of alleged tax breaks, perhaps they should enforce some of the existing rules, for example those surrounding Personal Service Businesses (PSB). On a side note, why are public companies being excluded from these new tax changes?

I think the true definition of “middle class” cannot be put on a threshold pedestal; it depends where you come from and what you aspire to be. On some level, I do not consider myself to be middle class – but up until the point I work 14 hours a day, along with my husband, to pay my bills, keep my staff busy and save for the education of our two kids, then I will consider myself to be truly middle class.

Suzanne, this is a sad reality that we will be facing soon. Being a small business owner is already difficult with the administration and compliance and now to add these changes, we are truly discouraging people to not be entrepreneurs. These tax changes actually lead to double taxation in most cases – hence we may see the collapse of small businesses and hence these “middle class” that liberals are trying to protect may become more vulnerable.